JPMorgan Chase London Whale Z: Background & Overview

Yale Program on Financial Stability Case Study 2014-2Z-V1

21 Pages Posted: 18 Mar 2015

See all articles by Arwin G Zeissler

Arwin G Zeissler

Yale University - Yale Program on Financial Stability

Rosalind L. Bennett

FDIC, Division of Insurance and Research

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: December 1, 2014

Abstract

In December 2011, the Chief Executive Officer and Chief Financial Officer of JPMorgan Chase (JPM) instructed the bank’s Chief Investment Office to reduce the size of its Synthetic Credit Portfolio (SCP) during 2012, so that JPM could decrease its Risk-Weighted Assets as the bank prepared to adopt the impending Basel III bank capital regulations. However, the SCP traders were also told to minimize the trading costs incurred to reduce Risk-Weighted Assets, while still maintaining the opportunity to profit from unexpected corporate bankruptcies. In an attempt to balance these competing objectives, head SCP derivatives trader Bruno Iksil suggested in January 2012 that the SCP expand a strategy first implemented in 2011 to buy large volumes of certain credit derivatives, while simultaneously selling large volumes of other credit derivatives. The strategy quickly proved unsuccessful, and JPM’s Chief Investment Officer ordered Iksil and the other SCP traders to halt this strategy on March 23. However, losses continued to mount as the credit derivative positions were unwound, ultimately reaching $6.2 billion by December 2012.

Keywords: Systemic Risk, Financial Crises, Financial Regulation

JEL Classification: G01, G28

Suggested Citation

Zeissler, Arwin G and Bennett, Rosalind L. and Metrick, Andrew, JPMorgan Chase London Whale Z: Background & Overview (December 1, 2014). Yale Program on Financial Stability Case Study 2014-2Z-V1. Available at SSRN: https://ssrn.com/abstract=2577839 or http://dx.doi.org/10.2139/ssrn.2577839

Arwin G Zeissler

Yale University - Yale Program on Financial Stability ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Rosalind L. Bennett

FDIC, Division of Insurance and Research ( email )

550 Seventeenth Street, NW
Washington, DC 20057
United States
202-898-7160 (Phone)

Andrew Metrick (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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